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HomeSense on Cents Central Station
Posted by Larry Doyle on April 23rd, 2009 4:32 PM |
BACK BY POPULAR DEMAND (special shout out to “silver”)! Join me this evening beginning at 8:30 p.m. ET for Sense on Cents Central Station. This endeavor is a few hours of written Q/A and live chat with your resident host, Larry Doyle. I like to utilize the theme of a ride on the rails, so please allow me to elaborate.
With so many cross currents at play in the markets, economy, and world of global finance, where can one go to develop a framework of understanding, enjoy the company of friends, and make sense of the madness? Welcome to Sense on Cents Central Station. Our ride departs at 8:30 p.m. with an expected return at 10:00 p.m. (I’m hoping this time frame allows our West Coast friends to join in). While we traverse the curves along our track, we can address a wide range of issues, including: Hank Paulson blindsiding Ken Lewis, 1st quarter earnings (their transparency and quality), market performance this week, month, and year to date, the outlook for our financial regulatory structure, issues of personal finance, career planning, or anything else on your mind.
Our ride is most productive with as many people participating as possible. Please bring not only your questions, but also your views. Invite friends, neighbors, and colleagues along for the ride as well. Together we can collectively navigate the economic landscape.
I look forward to chatting with you beginning at 8:30 p.m. All Aboard!!
LD
Market Sentiment Very Balanced
Posted by Larry Doyle on April 23rd, 2009 2:06 PM |
Our Economic All-Star Laszlo Birinyi has recently had some very good calls on the market. His funds are outperforming the major stock market averages by 10-15%. Birinyi is an excellent stock picker but also has an experienced professional’s “feel” for the market.
His weekly Blogger Sentiment Poll provides us an easy snapshot as to current investor attitudes. Recall that when a bullish reading approaches 30%, it is an indication of the market being oversold. Similarly, if a bullish reading approaches 70% it is an indication of the market being overbought.
The market overall has done somewhat better over the last few weeks but has given some of that improvement back in this week’s trading. In investment terms, this price action is known as “running in place,” “range trading,” or “moving sideways.”
Not surprisingly, the readings in Birinyi’s polls indicate a very balanced short term sentiment.
LD
Ticking Time Bomb
Posted by Larry Doyle on April 23rd, 2009 11:43 AM |
If a picture speaks a thousand words, then please take a look at the graph from the St. Louis Federal Reserve highlighting the recent growth in our domestic money supply:
None other than esteemed Harvard University economist, Martin Feldstein, is warning us about the impending threat of inflation. Some analysts view deflation as the near term threat, but it is not inconceivable that our economy has an initial bout of stagflation given the prospects of a sluggish economy. If and when the economy turns, we will then likely experience a rapid rise of inflation with a real threat of hyperinflation.
Bloomberg recently discussed these topics with Feldstein and reports, Harvard’s Feldstein Sees U.S. Inflation Danger After 2010.
How do we prevent inflation from occurring? Picture Ben Bernanke and Tim Geithner trying to gracefully and smoothly manage a decline in the money supply from what appears on the above graph to be a likeness of the cliffs of Mount Kilimanjaro.
As Feldstein warns:
the Federal Reserve will have a challenge in heading off inflation because of how it’s conducted monetary policy during the crisis.
Instead of expanding the central bank’s balance sheet by purchasing easy-to-sell Treasuries, the Fed has snapped up mortgage securities that are likely to be tougher to use as a tool to soak up cash, Feldstein said.
In an earlier interview with Bloomberg Television, Feldstein said he didn’t anticipate a lending boom from banks judged to have passed U.S. regulators’ stress tests on their balance sheets.
In light of this threat, I think global interest rates may move sharply higher over the course of the next 1-2 years.
LD
Ken Lewis: Great American or Mere Corporate Pawn?
Posted by Larry Doyle on April 23rd, 2009 6:58 AM |
When Ken Lewis, CEO of Bank of America, purchased Merrill Lynch last Fall did he put country first but his shareholders’ interests second? The WSJ Reports Lewis Testifies U.S. Urged Silence on Deal.
The BofA purchase of Merrill did not feel “right” to me from the outset. Why? Recall that at the time of this deal, Lehman had just failed and other investment banks’ stocks (Merrill, Morgan Stanley, Goldman Sachs) were plummeting. Given that dynamic, why did BofA pay a fairly sizable premium for a firm in distress? Merrill’s stock was trading somewhere in the mid-teens but BofA paid the equivalent of $29 a share. It is said that Lewis paid such a premium in order to retain the renowned Merrill retail brokerage staff, but it struck me as more directed by Uncle Sam than anything else.
In early February I questioned What Really Happened With Merrill and B of A. I summarized then that normal business decisions and strategy do not occur when operating in uncharted waters. Well, in the last two and a half months our economy and financial industry have moved into even deeper waters.
In looking back at the height of the waves swamping the Merrill ship, the WSJ report reminds us: (more…)
U.K Tax Increase of 25%: A Sign of Things To Come?
Posted by Larry Doyle on April 22nd, 2009 1:36 PM |
If you think things are challenging here in the U.S., be thankful you do not currently live in the United Kingdom. Given the massive deficits in both countries, the debts are already sizable and GROWING.
How does an individual, a company, or a government pay a massive debt? Pay it, borrow more, decrease headcount, scale back services, and increase the price of admission–as in higher taxes!! Actually, most private and public entities are utilizing a combination of these tactics – if not all of them – to combat outstanding debts.
In the face of rising deficits and soaring government spending globally, we are also witnessing significant social frustrations. The frustrations here in the U.S. were evidenced by the number of Tea Parties on April 15th.
Across the pond in the U.K., the deficit relative to GDP is off the charts. Some have speculated that the U.K. may need financial assistance from the IMF. Before the Gordon Brown led government does that, though, it will utilize all the other tools in the bag. To that end, the tax rate on the upper income will be increased by 25%, from a 40% level to a 50% level!! That increase is being accelerated from a 2011 implementation to 2010. A U.K. government promise of “no new taxes” just went the way of George H.W. Bush.
The BBC sheds light on the massive fiscal problems facing the U.K., Tax Rise As U.K. Debt Hits Record.
While I thought our fiscal problems were bad, the current U.K. fiscal situation is a nightmare. Given the similarities in our fiscal policies, is the current reality in the U.K. a sign of things to come here in the United States?
LD
Freddie Mac’s David Kellerman
Posted by Larry Doyle on April 22nd, 2009 11:54 AM |
The news this morning of the death of David Kellerman, acting CFO of Freddie Mac, stopped me in my tracks. In my career on Wall Street, I crossed paths with David numerous times. David was a consummate professional and a real gentleman.
While the trials and tribulations of our economy are challenging, the pain felt by employees of Freddie Mac, the friends of David, and the Kellerman family must be indescribable.
I extend my sympathies to all of them at this time.
LD
The FT reports Freddie Mac’s Kellerman Found Dead
Will Bank Stress Tests Be “Put on a Curve?”
Posted by Larry Doyle on April 22nd, 2009 9:10 AM |
Will the soon to be released Bank Stress Tests provide real clarity on the health of our banking industry or will the tests be “curved?” Meredith Whitney, highly regarded bank analyst, has indicated that the tests will provide plenty of wiggle room for the banks. Just yesterday Secretary Geithner “goosed” the market by indicating the majority of banks have sufficient capital. To what degree can we trust what Turbo-Tim is telling us?
Mohamed El-Erian, CEO of PIMCO (Pacific Investment Management Company) provides a blueprint for an honest review of the Stress Tests. Mr. El-Erian highlights the following in a Financial Times article:
First, transparency is key. Whether the government likes it or not, hundreds of analysts around the world will reverse engineer the stress tests. The government would be well advised to assist the process through clarity. Obfuscation would result in damaging market noise and further derail the real economy. At the minimum, policymakers need to provide credible details on the methodology, the underlying assumptions and scenario analyses.
To this point, neither the banks nor the government have provided real transparency. What are we to expect when Congress pressures the FASB to relax mark-to-market accounting thus forever clouding real transparency?
Second, the results of the stress tests must be part of a comprehensive, forward-looking package to resolve problems at banks. Out-performing banks should be provided with exit mechanisms from the exceptional government support that they have been receiving and, presumably, no longer need. At the other end, there must be clarity as to how capital-deficient banks that no longer have access to private capital will be handled. (more…)
Missed Opportunity
Posted by Larry Doyle on April 21st, 2009 7:52 PM |
Yesterday I asked, Is The Stimulus “Stimulating?” Today, Bloomberg reports how Caterpillar Says U.S. Stimulus ‘Missed Opportunity‘. Specifically, the bulldozer manufacturer described the Stimulus Package as “disappointing and less effective than measures approved by China.”
“The infrastructure portion of the stimulus package was disappointing in that it was less aggressive than other countries and missed an opportunity to correct past underinvestment in U.S. infrastructure.”
In my piece, I highlighted how the Stimulus Package was more a promotion of the Democratic agenda rushed through Congress without a full and proper review. Without targeted spending on immediate areas of need and benefit, our economy suffers while our deficit worsens. While the Democratic leadership railroaded the Stimulus legislation through Congress, which country did enact targeted fiscal stimulus? China.
The Chinese economy is benefitting from their stimulus while many workers in our country suffer. While President Obama visited Caterpillar in February to push the Stimulus Package, I do not get the sense that he would be invited back now. Caterpillar’s CFO said:
“We think China has it right,” Chief Financial Officer Dave Burritt said in an interview. “The majority of their package is on infrastructure spending. We are seeing life there. We are seeing the turnaround. We would like to see a more robust infrastructure package in the United States.”
I would qualify that statement as a courteous indictment of the political process in our country. Caterpillar is not the only company benefitting from the Chinese stimulus. Additionally,
United Technologies Corp., Eaton Corp., and Dupont Co. are among other U.S. industrial companies that said they have seen results from China’s plan. This week all three reported first- quarter sales declines ranging from 12 percent to 20 percent.
United Technologies’ fire and security division “is seeing some benefits from the stimulus already in terms of the dollars which are flowing through to infrastructure,” Akhil Johri, the head of investor relations, said today. The Hartford, Connecticut-based company is the maker of Otis elevators, Carrier air-conditioners and Pratt & Whitney engines.
At Wilmington, Delaware-based DuPont, the third-biggest U.S. chemical maker, “electronics customers are reporting some benefit from the China stimulus package,” CEO Ellen Kullman told analysts on a call today.
Eaton CEO Sandy Cutler, on a conference call yesterday, described China as “the first market where we can really string things through to government stimulus activity.”
Caterpillar predicted the U.S. recession in October 2007, two months before it officially began, and said today it expects the world economy to decline about 1.3 percent this year.
Missed opportunities do not necessarily always present themselves again.
LD
Is The Economy Turning The Corner?
Posted by Larry Doyle on April 21st, 2009 7:05 AM |
Markets correct by price (both up and down) and time (extended). Despite the 3+% price declines in equity markets yesterday, the markets are up approximately 20% since the market lows seen on March 6th. Some analysts believe this upward move signals an improvement in the economy largely due to the fiscal and monetary stimulus provided by Uncle Sam. I am not in that camp.
A few emerging economies, specifically China, have improved. Can the rest of the world, including the U.S., expect those economies to be the engine for a global turnaround at this juncture? I do not think so. I still see the following issues on our domestic horizon:
1. continued deterioration in loan performance on bank books
2. a banking system woefully capital deficient
3. an automotive industry which must downsize
4. municipalities which are faced with the predicamant of capital shortfalls and underfunded pensions
5. commercial real estate just starting to experience real defaults
6. a housing market with increased foreclosures pressuring prices
7. an unemployment rate clearly headed toward double digits
Earnings reports for the first quarter have been mixed. I view the recently reported bank earnings as largely “managed” via accounting gimmicks. Meredith Whitney believes the earnings for major money center banks will turn negative in the 2nd quarter. The regional banks, without the benefit of large capital market activities but facing credit writedowns, report earnings today. Key Corp just reported a loss of $1.09 eps (earnings per share) versus an estimate of -.21. I suspect we will see losses from other regional banks of a similar magnitude. (more…)
